What a difference a week makes. The US Dollar surged versus the Euro and other major forex counterparts and the Dow Jones FXCM Dollar Index posted its single-largest weekly gain in 5 months. Why? And—more importantly—can it last?

Traders sent the Greenback and US Treasury Yields significantly higher following the US Federal Open Market Committee’s decision to leave policy and rhetoric unchanged. The key question is whether both yields and the domestic currency can continue their recent surge, and a busy week of economic event risk promises big swings ahead.

US Dollar traders await the results of October US Nonfarm Payrolls numbers as well as 3rd Quarter economic growth figures—both with the potential to force important US Dollar volatility. Indeed, short-term forex volatility prices have surged ahead of the week which likewise features potentially important European Central Bank, Bank of England, and Reserve Bank of Australia interest rate decisions.

Economists expect that US labor market growth slowed significantly in October and that Q3 GDP figures will show lower economic growth through September; the combination should be US Dollar-bearish. Yet expectations were similarly downbeat ahead of this past week’s FOMC rate decision, and the central bank announcement actually sparked the largest single-week USDOLLAR rally since Chairman Ben Bernanke first discussed the so-called “Taper” in June.

A significant deterioration in economic data could take the wind out of the Dollar’s sails, and we’ll need to keep a close eye on economic data and reactions in US yields. Else traders will look to the ECB, RBA, and BoE to drive important FX moves. The European Central Bank decision might be the most contentious of the three; analysts are broadly calling for further easing, but President Mario Draghi seems more likely to keep policy and market outlook roughly unchanged.

There’s obviously risk that the Greenback fails to continue higher after a week of impressive gains. Yet its substantial rally off of recent lows sets the stage for continued strength, and our sentiment-based trading strategies have recently gotten long USD across major FX counterparts.

The stage is set for an eventful first full week of trading in the new calendar month. – DR

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